3M raises prices to beat back inflation, squeaking out a quarterly win

Inflation and supply chain problems: the two factors nearly every company now cites to explain financial results are also to blame for 3M's lower profit last quarter.

Despite these pressures, the Maplewood-based company on Tuesday beat analyst estimates for the last three months of 2021, reporting a $1.3 billion profit on $8.6 billion in sales.

For its fourth quarter ending Dec. 31, 3M posted flat sales and a 4.7% drop in profit compared to the same period a year ago, a better performance than company leaders anticipated.

"I am pleased with how we effectively managed production operations to meet customer demand, despite ongoing logistics and raw material challenges that are impacting many companies," chief executive Mike Roman told investors on a conference call Tuesday morning.

The industrial giant's sales increased 0.3% for the three-month period as it raised prices for its products by 2.6%.

"We implemented big price increases in the fourth quarter," said Monish Patolawala, 3M's chief financial and transformation officer. "If we see the need in 2022, we'll do the same."

A semiconductor shortage, challenges with shipping, warehousing and labor, the pandemic and last February's major winter storm all contributed to "inflationary pressures throughout the year," Patolawala said. Price increases helped offset the increased cost of doing business.

"I think the first half is going to be tougher than the second half of 2022 when it comes to inflation," he said. "We are still seeing sequential increases, but slower, which is good."

The company narrowly edged Wall Street expectations on revenue for the fourth quarter and beat earnings predictions by $0.30 per share, according to Refinitiv.

For the full year, sales rose nearly 10% to $35.3 billion. Profits rose 8% to $5.9 billion.

Each of the company's four business segments saw growth in 2021. In the fourth quarter, sales rose slightly in health care and consumer, but dropped in the other two units: safety and industrial, and transportation and electronics.

Strong demand for home improvement products like wall hangings as well as office supplies helped boost sales.

3M sold 40 million more respirators than it expected in the fourth quarter, but was still 110 million behind 2020 levels.

Patolawala said N95 and other respirator sales have likely peaked and will continue to fall this year, though the company "remains prepared" to ramp up production as needed.

3M's litigation expenses were cut in half in 2021 compared to 2020. The company paid out $49 million last year in "significant litigation-related matters," including issues related to PFAS, which are colloquially called "forever chemicals."

Roman said the company is working to keep a plant in Belgium running after regulators there banned PFAS emissions last fall.

"It could have a material impact and potentially interrupt production at the site," he said. "This is a priority for us."

Roman said the company is also facing six more bellwether earplug trials this year.

An analyst report from RBC Capital Markets warned earlier this month that "3M's PFAS litigation outlook will get much worse before it gets better. The catalyst is expected to be when the EPA classifies these PFAS 'forever chemicals' as a hazardous substance."

Morningstar analyst Joshua Aguilar, meanwhile, wrote that "litigation fears are overblown."

"That said, 3M hasn't grown intrinsic value over the past three and a half years by our measure, which we attribute to a combination of self-inflicted wounds and pandemic-related headwinds," he wrote. "Even so, we think the firm is well-positioned in some higher-growth markets."

3M leaders on Feb. 14 will provide more detailed guidance on its 2022 outlook. The sale of 3M's food safety business to Neogen, announced last month, is expected to close by this fall.

The company's stock rose a half-percent to close Tuesday trading at $173.75.